Australian body corporate funds go missing – could it happen here?

An Australian body corporate manager has pleaded guilty to misappropriating in excess of $1 million of body corporate funds. The company handled levies for around 240 bodies corporate, totalling around 5,500 unit owners.

Liza Fry Irvine

Various states in Australia regulate body corporate managers to some degree, but no such regulation exists in Queensland where this manager operated. Many managers voluntarily join “Strata Community Australia”, which provides an accreditation system and ensures managers are qualified and capable of managing strata developments. This is certainly a step in the right direction, but the Australian strata industry wishes more was done at national level to protect funds.

As was the case in Queensland, the absence of regulation around body corporate managers in New Zealand leaves body corporate funds at risk. The call for body corporate managers to be regulated in New Zealand is not unfamiliar. The debate was broached as far back as 2004 in the Department of Building and Housing’s “Review of the Unit Titles Act 1972” discussion document, which sought submissions on regulating body corporate managers and their relationship with bodies corporate. Despite this, the Unit Titles Act 2010 and 2011 Regulations are silent on the matter, much to the disappointment of many in the industry, including body corporate managers themselves.

The debate was further fuelled by the review of the Real Estate Agents Act in 2009, which omitted to regulate property managers who, like body corporate managers, are entrusted with client funds. Our government at the time felt there was no need to regulate residential property managers, but commercial letting agents still had to have a real estate licence, just as they did under the 1976 Real Estate Agents Act. Residential property managers who are part of a real estate agency must also operate under an agency’s licence. However, where a manager uses an independent third party trust account, the money-handling provisions do not apply. Where residential property managers have no ties to a real estate agency, they operate completely unregulated. So too do body corporate managers.

ADLS Public Issues Committee paper
In February 2012, ADLS’s Public Issues Committee released an enlightening paper entitled “Property Managers and Body Corporate Secretaries – Is your Money Safe?”, highlighting the risks of unregulated persons holding funds (see / media/5462290/property-managers-and-body-corporate- secretaries-is-your-money-safe.pdf).

Property managers and body corporate managers are similar in many ways, but body corporate managers are often dealing with larger sums of money for longer periods, making them an ideal target for regulation. Without regulation, the unit title industry must rely solely on the limited protections in the Unit Titles Act 2010 and its Regulations.

Recent increases in funds held by body corporate managers
Under the 2010 Unit Titles Act, body corporate managers are being relied upon to collect, hold and distribute significant levels of funds, more so than under the 1972 Unit Titles Act. There are many reasons for this, including the introduction of a compulsory long-term maintenance plan, the added responsibility on bodies corporate to repair and maintain unit property in certain circumstances, and a steady increase in the number of bodies corporate receiving settlement funds under leaky building claims or insurance claims and carrying out large scale remedial works. The Christchurch earthquakes have resulted in a unique set of circumstances where bodies corporate are holding large insurance payments while ascertaining whether to rebuild. As high-rise housing intensifies around the country, particularly in Auckland, there will be a further increase in funds held.

Basic human nature leaves some owners suspicious of their body corporate manager when it handles funds without regulation, with no qualifications required, no prerequisite training courses or ongoing compulsory professional development, and no professional body overseeing its actions. Some owners may not ask the hard questions to ensure the appointed manager follows proper processes.

There are many body corporate managers with excellent money-handling processes and some have seized the lack of regulation as an opportunity to distinguish themselves in the market, and rightly so. Various leading body corporate management businesses in Auckland have their accounts audited annually, partition each body corporate fund so they are individually identifiable, and pay interest earned to the body corporate. Some also voluntarily adopt accounting standards.

Unfortunately, it only takes one bad banana to spoil a good bunch. The government’s unwillingness to regulate in this area provides little protection and fails to meet the stated purpose of the Unit Titles Act at section 3(d) “to protect the integrity of the development as a whole”.

Many body corporate managers also wish to see their own industry regulated. From their perspective, regulation breeds a higher level of trust from their body corporate clients and the public in general, sets a high benchmark of professionalism and service, encourages transparency and discourages misconduct.

The Ministry of Business, Innovation and Employment (MBIE) intended to carry out a full evaluation of the Unit Titles Act 2010 starting late 2013. However, there has been no word of a review as yet. In the meantime, there is a number of steps a body corporate and its members can take to reduce their exposure and protect them from a “ticking time bomb”.

Carry out a health check
Much of the concern around body corporate managers handling funds might also come from a lack of understanding of the checks and balances that exist in the 2010 Act. One aim of the 2010 Act was to empower owners to participate in the running of the body corporate and take ownership of its operation. Bodies corporate should be encouraged to carry out a “health check” of their current processes for dealing with funds, which in turn will improve their understanding of the Unit Titles Act and the money-handling systems of their appointed body corporate manager. Even smaller bodies corporate without a body corporate manager would benefit from doing the same.

A body corporate should request information from its body corporate manager on its policies around handling client funds. In particular, ascertain how the manager’s body corporate bank accounts are operated, what number of signatories are required, who they are and on what basis such policies can be changed. Ask whether the body corporate manager has its own accounts audited annually and what level of audit is used. Establish on what basis funds are used, how receipts and withdrawals are recorded and whether funds are clearly identified as belonging to the particular body corporate. Ensure all interest earned on funds is applied to the body corporate and not kept by the manager. Last but not least, check the manager has professional indemnity insurance.

Money management under the 2010 Unit Titles Act and its Regulations
As well as making the above investigations, a body corporate has to comply with the money management requirements imposed upon it under the Unit Titles Act and Regulations. Even where its funds are handled by a manager, the body corporate is not absolved of responsibility. It must ensure the requirements are met.

Historically, the financial management provisions under the 1972 Unit Titles Act were contained in the body corporate rules. They could be amended by resolution and were at risk of abuse. All financial management provisions in the 2010 Act are now entrenched within the Act and its Regulations. Therefore, they cannot be amended through rule changes, thus reducing the risk of abuse. The 2010 Act’s introduction of separate funds for different purposes also adds transparency and an additional layer of protection.

Regulation 120 requires the body corporate to either establish a separate bank account for every fund, or establish a single bank account in which the respective funds are kept entirely separate and are able to be identified. The latter would require the manager having a single bank account for all client funds with partitioned sub-accounts for each body corporate fund. A prudent body corporate should check its manager has complied with regulation 120 on its behalf.

If the body corporate manager has a trust account, further investigations should be made to ascertain on what basis, and confirmation sought from its bank that it is recognised as a trust account. Having “trust account” in the account name is not sufficient on its own. Body corporate managers are not subject to trust account regulations, as are solicitors and real estate agents. It is essential that client funds are not sitting in the manager’s trading account. Funds held for long periods (such as long term maintenance funds) should be held on interest-bearing deposit for the benefit of the body corporate, although sadly this is not a requirement under the Unit Titles Act.

Financial statements should comply with section 132, introduced to ensure transparency and the use of proper accounting practices. Wherever a body corporate manager is engaged, the body corporate should be encouraged to have its own accounts independently audited. This audit should be separate to the audit of the manager’s own business accounts. There is the ability in the Unit Titles Act for the body corporate to choose a lower level of review, such as a review by an accountant and not an auditor, or to opt out of this requirement completely by special resolution. While the cost of review may be a concern, the level of audit could be assessed on the basis of the degree of control an individual has over body corporate funds and the complexities of the body corporate accounts.

Unlike real estate agents, solicitors and accountants (who must adhere to compulsory standards around handling funds and preparing accounts), body corporate managers are left to their own devices. Owners should check whether the manager voluntarily applies any standards and what those standards are.

Consider adding clauses to the body corporate manager’s appointment agreement to protect funds or place limits on expenditure the manager can incur on the body corporate’s behalf, where appropriate. Be mindful that a balance is needed between operating efficiently and safeguarding funds.

Ensure an ordinary resolution is passed to establish a bank account, but note that a special resolution must determine who can operate it and under what conditions. This must reference the body corporate manager where one is appointed to operate an account.

Where a committee has been delegated these powers, consider whether the delegation is appropriate. In some instances, it may be prudent to leave all financial management powers with the body corporate, though this may slow day-to-day operations and become inefficient. Where delegation is made to the committee, leaving it responsible for managing body corporate funds and overseeing the manager’s role, caution should be exercised by committee members and the body corporate chairperson to avoid potential personal liability where financial mismanagement occurs.

Limitations are also imposed under the Unit Titles Act on operating account expenditure where no contingency fund exists, and on the use of long-term maintenance funds, including where expenditure on a single item is 10% over budget.

Final comments
Together, the provisions discussed above provide some protection over body corporate funds held by body corporate managers, but serious gaps are evident. Those body corporate managers that operate in compliance with the Unit Titles Act and impose additional protections upon themselves (for the benefit of their clients) set a standard of management to be emulated across the industry. But as not all meet this standard, regulation is warranted to minimise the possibility of a scandal similar to that experienced by our neighbours in Queensland.

ADLS’s Property Law Committee intends to request that MBIE consider regulating the handling of funds by body corporate managers during its next review of the Unit Titles Act. The Committee welcomes your input. Comments can be sent to the Committee’s Secretary, Ben Thomson at ben.thomson@adls.org.nz.

If you are interested in other unit title and body corporate issues, please register for the upcoming ADLS CPD webinar on 21 October 2014, entitled “Unit Titles Unleashed – Practical Tips on Rules and Committees”, being presented by Joanna Pidgeon and Liza Fry-Irvine of Pidgeon Law. For details please see www.adls.org.nz/cpd.

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